Pierce Control Systems case 1. Based on the 10 percent compensating balance requirement, how much would Pierce Control Systems have to borrow to acquire $10 million in needed funds?

Solution: Compensating balance = 10% → 0.10 Amount needed = $10,000, 000

[pic] [pic]

Check: Loan = $11,111,111 Compensating balance = 10% → 0.10 = loan ∙ 0.10 = $11,111,111 ∙ 0.10 = $1,111,111

Available funds = Loan – Compensating Balance Available funds = $11,111,111 - $1,111,111 Available funds = [pic]

Answer: Pierce Control Systems would have to borrow $11,111,111 in order to acquire $10 million in needed funds with a 10 percent compensating balance.

2. Would the cost of the bank loan
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9% |

|9| |

|9| |

|6| |

|1|9% |

|9| |

|9| |

|7| |

|1|4% |

|9| |

|9| |

|8| |

Solution:

|Y|Projected Prime Interest Rate |Future

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